Limit Order in a Nutshell
Explore the benefits and ways to use limit orders. If you're new to the world of trading, understanding limit orders is a must – this article breaks it down for you.
When buying or selling assets in the financial markets, one of the most common tools used by traders is the limit order. A limit order is a type of order to buy or sell an asset at a specific price or better. In the world of cryptocurrency trading, limit orders are particularly useful in situations of high volatility and/or low liquidity. In this article, we will discuss what limit orders are, how they work, and why they are important for crypto traders.
TL;DR
- A limit order is an order to buy or sell an asset at a specified price (or better)
- Limit-buy is set at a lower than the current price and Limit-sell is set higher
- Orderbook is a set of all open orders on a specific exchange
- In the crypto market, limit orders allow to manage risk by creating stop-loss, execute orders in high volatility and automate trading with bots and algorithms
What is a Limit order?
A limit order is a type of order to buy or sell an asset, such as a cryptocurrency, at a specified price or better. It is called a "limit" order because the trader sets a price limit that they are willing to buy or sell at, and the order is only executed if the market price reaches or exceeds that limit. Once a limit order is placed, it enters into an orderbook.
Orderbook
Orderbook is a list of all open orders for a particular asset on an exchange. Orderbooks are organized by price levels, with the highest bid and the lowest ask prices at the top of the book. When the bid and ask prices match, a trade occurs and the order is fulfilled. Understanding orderbooks is crucial for traders who want to effectively use limit orders to buy or sell assets.
Types and parameters of Limit orders
The most common types of limit orders are buy-limit orders and sell-limit orders. Buy-limit orders are placed at a price lower than the current market price, while sell-limit orders are placed at a price higher than the current market price. Stop limit orders, on the other hand, combine a stop order and a limit order to create an order that only executes once a specified price has been reached. Traders can also set parameters such as the order size, price, and duration
Benefits of using Limit orders in the crypto market
The crypto market is a specific and high-paced environment, and as such requires proper trade management. Using limit orders in crypto markets can provide various benefits, including:
- Price Control: With a limit order, a trader can specify the exact price at which they want to buy or sell an asset. This ensures that the trader gets the desired price and prevents them from having to settle for a less favorable price.
- Risk Management: Limit orders can be used to manage risk by placing stop-loss orders. These orders are designed to limit losses by selling an asset at a predetermined price if the market moves against the trader.
If you want to know more about the risks of capital markets, as well as how to manage them, check out our post on Inherent risk.
- Increased Efficiency: Using limit orders can increase efficiency by automating the trading process. Traders can set up orders in advance and let them execute automatically when the desired price is reached.
Where and how to use a Limit order?
Centralized exchanges (CEXs)
Centralized exchanges, such as Binance or Coinbase, are platforms that are owned and operated by a single entity. To use limit orders on these exchanges, traders must first create an account and deposit funds. Once they have done so, they can navigate to the trading section and select the cryptocurrency they want to trade. From there, they can choose to place a limit order and enter the desired price and amount.
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After placing the order, the exchange's orderbook will show the limit order alongside other buy and sell orders. If the market reaches the desired price level, the order will be executed automatically. If not, the order will remain open until it is either filled or canceled by the trader. |
Decentralized exchanges (DEXs)
The situation on DEXs is a bit more complicated. Because of the way how liquidity pools work, the price at which users swap is always the market price. Luckily, there are DEX aggregators that add this functionality.
Users they can choose to place a limit order by using a third-party tool like 1inch or Matcha. These tools allow traders to set a target price and the amount they want to trade, and then automatically execute the order when the market reaches the desired price level.
Above you can see examples of the UI from the 1inch DEX aggregator, which lets users select the limit price of their order.
FAQs
What is the difference between a limit order and a stop-limit order?
A limit order is an order requesting the purchase or sell of securities should a specific price be met. A stop-limit order builds one additional layer that requires a specific price be met that is different than the sale price.
How can limit orders be used?
Limit orders can be used in conjunction with stop-losses to prevent large downside losses.
Stop orders are used to set a maximum loss on a trade. When the stock price drops to the stop order price, the limit order is triggered and the trade is filled at the limit order price or better.
How long does a limit order last?
The term of the limit order will depend on the specification and the broker’s policy. Many brokers default limit orders to only 1 day. Other brokers may offer a specific number of days (i.e. 30 days, 60 days, or 90 days). Some brokers offer limit orders that are considered good until filled; the limit order will remain valid until it is filled or deliberately canceled by the trader.
